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1. Which of the following is not correct?

a. The inflation rate is measured as the percentage change in a price index.
b. For the last 40 or so years, U.S. inflation hasn’t shown much variation from its average rate of
about 2 percent.
c. During the 19th century there were long periods of falling prices.
d. Some economists argue that the costs of moderate inflation are not nearly as large as the general
public believes.

2. If P denotes the price of goods and services measured in terms of money, then
a. 1/P represents the value of money measured in terms of goods and services.
b. P can be interpreted as the inflation rate.
c. the supply of money influences the value of P, but the demand for money does not.
d. All of the above are correct.

3. Other things the same, an increase in velocity means that

a. the rate at which money changes hands falls, so the price level rises.
b. the rate at which money changes hands falls, so the price level falls.
c. the rate at which money changes hands rises, so the price level rises.
d. the rate at which money changes hands rises, so the price level falls.

4. When the money market is drawn with the value of money on the vertical axis, an increase in the
price level causes a

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a. shift to the right of the money demand curve.
b. shift to the left of the money demand curve.
c. movement to the left along the money demand curve.
d. movement to the right along the money demand curve.

5. Open-market purchases by the Fed make the money supply

a. increase, which makes the value of money increase.
b. increase, which makes the value of money decrease.
c. decrease, which makes the value of money decrease.
d. decrease, which makes the value of money increase.

6. When shopping you notice that a pair of jeans costs $20 and that a tee-shirt costs $10. You
compute the price of jeans relative to tee-shirts.
a. The dollar price of jeans and the relative price of jeans are both nominal variables.
b. The dollar price of jeans and the relative price of jeans are both real variables.
c. The dollar price of jeans is a nominal variable; the relative price of jeans is a real variable.
d. The dollar price of jeans is a real variable; the relative price of jeans is a nominal variable.

7. Velocity is
a. Y/(M x P) and increases if dollars are exchanged less frequently.
b. Y/(M x P) and increases if dollars are exchanged more frequently.
c. (P x Y)/M and increases if dollars are exchanged less frequently.

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d. (P x Y)/M and increases if dollars are exchanged more frequently.

8. Suppose the money supply tripled, but at the same time velocity fell by half and real GDP was
unchanged. According to the quantity equation the price level
a. is 1.5 times its old value.
b. is 3 times its old value.

c. is 6 times its old value.

d. is the same as its old value.

9. A country purchases $3 billion of foreign-produced goods and services and sells $2 billion
dollars of domestically produced goods and services to foreign countries. It has
a. exports of $3 billion and a trade surplus of $1 billion.
b. exports of $3 billion and a trade deficit of $1 billion.
c. exports of $2 billion and a trade surplus of $1 billion.
d. exports of $2 billion and a trade deficit of $1 billion.

10. Suppose that foreign citizens decide to purchase more U.S. pharmaceuticals and U.S. citizens
decide to buy more stock in foreign corporations. Other things the same, these actions
a. raise both U.S. net exports and U.S. net capital outflows.
b. raise U.S. net exports and lower U.S. net capital outflows.
c. lower both U.S. net exports and U.S. net capital outflows.
d. lower U.S. net exports and raise U.S. net capital outflows.

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11. If a country changes its corporate tax laws so that foreign businesses build and manage more
business in that country, then that net capital outflow of that country
a. and the net capital outflow of other countries rise.
b. rises and the net capital outflow of other countries fall.
c. falls and the net capital outflow of other countries rise.
d. None of the above are correct.

12. A U.S. company uses U.K. pounds it already owned to purchase bonds issued by a company in
the U.K. Which of these countries has an increase in net capital outflow?
a. The U.S. and the U.K.
b. The U.S. but not the U.K.
c. The U.K. but not the U.S.
d. Neither the U.S. nor the U.K.

13. Which of the following statements is incorrect for an open economy?

a. A country can have a trade deficit, trade surplus, or balanced trade.
b. A country that has a trade deficit has positive net capital outflow.
c. Net exports must equal net capital outflow.
d. National saving equals domestic investment plus net capital outflow.

14. An American farm equipment dealer sells dollars to obtain euros. It then uses the euros to buy
farm equipment from a German company. This exchange
a. increases U.S. net capital outflow because Germans obtain U.S. assets.
b. decreases U.S. net capital outflow because Germans obtain U.S. assets.

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c. increases U.S. net capital outflow because the U.S. buys capital goods.
d. decreases U.S. net capital outflow because the U.S. buys capital goods.

15. A country has a trade deficit. Which of the following must also be true?
a. net capital outflow is positive and domestic investment is larger than saving
b. net capital outflow is positive and saving is larger than domestic investment
c. net capital outflow is negative and domestic investment is larger than saving
d. net capital outflow is negative and saving is larger than domestic investment

16. If a bushel of wheat costs $6.40 in the United States and costs 40 pesos in Mexico and the
nominal exchange rate is 10 pesos per dollar, then the real exchange rate is
a. 1.60
b. 1.25
c. .625
d. None of the above is correct.

17. U.S. corporation Well’s Petroleum borrows money to build an oil well in Texas and to build
another in Venezuela. Borrowing for which well is included in the demand for loanable funds in
the U.S.?
a. The U.S. and Venezuela.
b. The U.S. only.
c. Venezuela only.
d. Neither the U.S. or Venezuela.

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18. If the demand for loanable funds shifts right, then
a. the real interest rate and the equilibrium quantity of loanable funds both fall.
b. the real interest rate falls and the equilibrium quantity of loanable funds rises.
c. the real interest rate and the equilibrium quantity of loanable funds both rise.
d. the real interest rate rises and the equilibrium quantify of loanable funds falls.

19. The value of net exports equals the value of

a. national saving.
b. public saving.
c. national saving - net capital outflow.
d. national saving - domestic investment.

20. In the open-economy macroeconomic model, if a country’s interest rate rises, then its
a. net capital outflow and net exports rise.
b. net capital outflow rises and its net exports fall.
c. net capital outflow falls and its net exports rise.
d. net capital outflow and net exports fall.

21. Suppose that Egypt has a government budget surplus, and then goes into deficit. This change
would
a. increase national saving and shift Egypt's supply of loanable funds left.
b. increase national saving and shift Egypt's demand for loanable funds right.

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c. decrease national saving and shift Egypt's supply of loanable funds left.
d. decrease national saving and shift Egypt's demand for loanable funds right.

22. If the government of Japan raised its budget deficit, then the yen would
a. depreciate and Japanese net exports would rise.
b. depreciate and Japanese net exports would fall.
c. appreciate and Japanese net exports would rise.
d. appreciate and Japanese net exports would fall.

23. Which of the following decreases if the U.S. imposes an import quota on computer
components?
a. U.S. imports and U.S. exports.
b. U.S. imports but not U.S. exports.
c. U.S. exports but not U.S. imports.
d. Neither U.S. exports nor U.S. imports.

24. If the U.S. imposed an import quota on construction equipment, then the sales of U.S.
construction equipment producers would
a. rise and the exports of other U.S. industries would rise.
b. rise and the exports of other U.S. industries would fall.
c. fall and the exports of other U.S. industries would rise.
d. fall and the exports of other U.S. industries would fall.

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25. The classical model is appropriate for analysis of the economy in the
a. long run, since evidence indicates that money is not neutral in the long run.
b. long run, since real and nominal variables are essentially determined separately in the long run.
c. short run, provided money is not neutral.
d. short run, provided real and nominal variables are highly intertwined.

26. When the price level falls the quantity of

a. consumption goods demanded rises, while the quantity of net exports demanded falls.
b. consumption goods demanded and the quantity of net exports demanded both rise.
c. consumption goods demanded and the quantity of net exports demanded both fall.
d. consumption goods demanded falls, while the quantity of net exports demand rises.

27. People will spend more if the price level

a. rises because rising prices increase the real value of a dollar.
b. rises because rising prices decrease the real value of a dollar.
c. falls because falling prices increase the real value of a dollar.
d. falls because falling prices decrease the real value of a dollar.

28. When the dollar appreciates, U.S.

a. exports decrease, while imports increase.
b. exports and imports decrease.

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c. exports and imports increase.
d. exports increase, while imports decrease.

29. Part of the explanation for why the aggregate-demand curve slopes downward is that a decrease
in the price level
a. decreases the real value of money.
b. increases the real value of the dollar in foreign exchange markets.
c. decreases the interest rate.
d. All of the above are correct.

30. When taxes decrease, consumption

a. decreases as shown by a movement to the left along a given aggregate-demand curve.
b. decreases as shown by a shift of the aggregate demand curve to the left.
c. increases as shown by a movement to the right along a given aggregate-demand curve.
d. increases as shown by a shift of the aggregate demand curve to the right.

31. Which of the following shifts aggregate demand to the right?

a. a decrease in the money supply
b. increases in the profitability of capital due perhaps to technological progress.
c. the repeal of an investment tax credit
d. a decrease in the price level

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32. Which of the following shifts long-run aggregate supply right?
a. an increase in either the physical or human capital stock
b. an increase in the human but not the physical capital stock
c. an increase in the physical capital stock, but no the human capital stock
d. neither an increase in the physical capital stock or the human capital stock

33. People choose to hold a smaller quantity of money if

a. the interest rate rises, which causes the opportunity cost of holding money to rise.
b. the interest rate falls, which causes the opportunity cost of holding money to rise.
c. the interest rate rises, which causes the opportunity cost of holding money to fall.
d. the interest rate falls, which causes the opportunity cost of holding money to fall.

34. When the Fed sells government bonds, the reserves of the banking system
a. increase, so the money supply increases.
b. increase, so the money supply decreases.
c. decrease, so the money supply increases.
d. decrease, so the money supply decreases.

35. If, at some interest rate, the quantity of money supplied is greater than the quantity of money
demanded, people will desire to
a. sell interest-bearing assets, causing the interest rate to decrease.
b. sell interest-bearing assets, causing the interest rate to increase.

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c. buy interest-bearing assets, causing the interest rate to decrease.
d. buy interest-bearing assets, causing the interest rate to increase.

36. Assume the money market is initially in equilibrium. If the price level decreases, then according
to liquidity preference theory there is an excess
a. supply of money until the interest rate increases.
b. supply of money until the interest rate decreases.
c. demand for money until the interest rate increases.
d. demand for money until the interest rate decreases.

37. In the short run, an increase in the money supply causes interest rates to
a. increase, and aggregate demand to shift right.
b. increase, and aggregate demand to shift left.
c. decrease, and aggregate demand to shift right.
d. decrease, and aggregate demand to shift left.

38. Open-market purchases

a. increase the price level and real GDP.
b. decrease the price level and real GDP.
c. increase the price level and decrease real GDP.
d. decrease the price level and increase real GDP.

39. If the stock market booms, then

a. aggregate demand increases, which the Fed could offset by increasing the money supply.
b. aggregate supply increases, which the Fed could offset by increasing the money supply.
c. aggregate demand increases, which the Fed could offset by decreasing the money supply.
d. aggregate supply increases, which the Fed could offset by decreasing the money supply.

40. In a certain economy, when income is $100, consumer spending is $60. The value of the
multiplier for this economy is 3. It follows that, when income is $101, consumer spending is
a. $60.60.
b. $60.67.
c. $61.33.
d. $63.00.

PART II. Exercises ( 40 points)

Question 1 ( 10 points)
How is the equilibrium exchange rate determined? Provide an example of the exports effect on the
demand for VietNam Dongs.

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Question 2 ( 30 points)
Consider an economy in long-run equilibrium. Draw a graph of the AD-AS model to show the
effect of each of the following (ceteris paribus) changes.
a. The economy’s central bank decreases the money supply
i. What happens to the aggregate output and price level?
ii. Does this economy face a short-run recessionary gap or an inflationary gap?
iii. What active stabilization policy can offset this particular shock?
iv. What would happen in the long run to the aggregate price and output levels without an active
stabilization policy?
b. Consumer confidence in the economy increases.
i. What happens to the aggregate output and price level?
ii. Does this economy face a short-run recessionary gap or an inflationary gap?
iii. What active stabilization policy can offset this particular shock?
iv. What would happen in the long run to the aggregate price and output levels without an active
stabilization policy?

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